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How Larry Summers' Memo Hobbled Obama's Stimulus Plan
The Obama administration's economic blueprint was fatally flawed: it led to a weak stimulus and premature deficit reduction
Those still wondering why the Obama administration surrendered so quickly on the drive for stimulus and joined the deficit reduction crusade, got the smoking gun in an article by the New Yorker's Washington correspondent Ryan Lizza. Lizza revealed a 57-page memo drafted by Larry Summers, the head of the National Economic Council, in the December of 2008, the month before President Obama was inaugurated.Larry Summers flanks Barack Obama at a press conference announcing the president's staff in November 2008. (Photograph: John Gress/Reuters)
The memo was striking for two reasons. First, it again showed the economic projections that the administration was looking at when it drafted its stimulus package. These projections proved to be hugely overly optimistic.
They showed that even without stimulus, job loss would peak at around 5 million in the 4th quarter of 2009. They projected that the economy would then begin to add jobs at a fairly rapid pace, regaining all the lost jobs by the end of 2011. In this non-stimulus baseline scenario, the unemployment rate never rose above 9.0%, which it would hit in the winter of 2010.
In reality, the economy had already lost almost 7 million jobs by May of 2009, the month when the first stimulus dollars were going out the door. The job loss didn't stop until February of 2010, at a point where the economy had lost 8.5m jobs. Even with the benefit of the stimulus, the economy is still down by more than 6m jobs from its pre-recession level.
The unemployment rate had already hit 9.4% when the stimulus first started to be felt in May of 2009. It eventually peaked at 10.0% in October of 2009.
In short, the economy was clearly in much worse shape than was implied by the projections that the Obama administration used in crafting its stimulus. In fairness to the Obama administration, these projections were in keeping with the consensus among economists at the time.
The other striking part of this memo is the concern with "bond market vigilantes". The memo discusses the need to focus on the medium-term deficit with the idea of reaching deficit targets by 2014. The highest deficit target listed in the memo for this year was 3.5% of GDP. The memo also includes calculations with a deficit target of 2.5% of GDP, and a balanced budget.
The deficit for the fiscal year that ended last October was 8.5% of GDP. Depending on how the payroll tax debate, the extension of unemployment benefits and a few other issues get resolved, the deficit is not likely to be very much lower in 2012.
This means that getting from a 2012 deficit near 8.0% of GDP to even the 3.5% target for 2014 would require some very serious budget cuts in an economy that will still be suffering from massive unemployment. The difference between a budget deficit of 8.0% of GDP and 3.5% of GDP is equal to almost $700bn annually.
To reach the lower targets that were favored in the memo would require even more heavy lifting. In short, the Obama administration made plans that were quite obviously based on a far too rosy view of the economy. While this favorable assessment was the prevailing view at the end of 2008, what is inexplicable is why the administration never appears to have strayed from its original path – even when it became clear that the economy was doing far worse than projected.
The memo discusses the need to both convince the markets of its seriousness about deficit reduction and to gain the support of "blue dog" Democrats, who were wary of excessive stimulus spending. However, these concerns should have been shelved as the job loss data for January, February and March came in, showing the economy losing close to 700,000 jobs a month.
The administration should have taken this opportunity at the very beginning of Obama's presidency to explain that the economy was actually in worse shape than they had realized and that much more stimulus would be needed. No one could blame the administration for the jobs that were lost in the first two or three months that he was in the White House.
Remarkably, though, the administration did not veer from the course described in this memo in spite of the conflicting economic data. In fact, President Obama began touting the "green shoots of recovery" at a point where the economy was still shedding 400,000 jobs a month.
And he argued for the need to shift the focus to deficit reduction. To show he was serious in this effort, he appointed his deficit commission. One co-chair was former Senator Alan Simpson, who had established a reputation as big-time proponent of cuts to social security and Medicare; the other co-chair was Morgan Stanley director Erskine Bowles.
In short, while the data was crying out for more stimulus, the Obama administration openly embraced the need for deficit reduction, effectively slamming the door on the prospect of further stimulus. The basis for this original sin can be found in that December memo, which, unfortunately, provided the administration's game plan long after it should have been clear that it had been superseded by events.
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55 Comments so far
Show AllThanks Dean Baker for making that so clear, its nice to have these little reminders before election time. But of course I totally disagree with most of your assumptions, I think President Obama was completely aware that the economy was driven in the ditch, and I think President Obama has done everything he can to plow the bottom of said ditch. I could say that it is my 'perfect hindsight' that draws this conclusion, but Candidate Obama's enthusiasm for world record campaign funds & the mighty office of The President of the United States was his opportunity to REJECT the $700B swindle that Baird, Bernanke, Paulson, & Cox presented. The meeting just before the election with President G.W. Bush & John McCain noted that Candidate Barack Hussein Obama was lockstep agreement with the likes of Pelosi, Dodd, Franks...for me it was and is very sad to watch. I'm not sad for President Obama's sake, I'm sad that this INTENTIONAL economic destruction was not just in the U.S. it went Global...so naturally it is impossible for me to believe you Dean Baker when your remarks attempt to excuse The President Obama, beginning with the appointment of current U.S. Treasury Secretary Geithner, The President was not hobbled, but knowingly 'followed the gameplan' for INTENTIONAL economic destruction, are we having fun yet?
whocares;)
After his election, exactly what benefit did Obama get from tanking the economy? Campaign funds for his election in 2012? That doesn't sound right.
I would only add to Dean Baker's view--Obama had faulty information about the state of the economy--that the president had faulty ideas about what grows the economy. He believes, along with his mentors Geithner and Summers, in basic supply-side mumbo jumbo, that making it easier for companies to invest in new factories will improve things even in the absence of consumer demand. We progressives insist demand comes first, that companies can't sell to people with no money. Obama has a conservative's take on economics (though he tries to project something else).
I watched Krugman tear his hair out through the whole damn mess.
Krugman who now dutifully falls in line as the election approaches.
That is true only from the pov of democrat haters.
Obviously didn't read his last column where he puts a smiley face on the economy.
I ALWAYS read Krugman's column and blog. I've learned a great deal from a very intelligent teacher. Your use of the term "smiley face" is a stretch. Krugman has pointed out that we are thankfully a little less stupid in our current policies than in Europe, and we are thus doing better than they are.
http://www.huffingtonpost.com/2012/01/23/paul-krugman-why-im-becom_n_1223137.html
and it looks like most everybody but the bots figured it out.
While I'm not a fan of austerity, neither do I believe we can borrow our way back to nirvana because "we are just borrowing from ourselves." I know this is false because I wouldn't lend me 20 bucks unless I absolutely had to.
It might be "borrowing" from us--but it ain't going to us.
As you say, this definitely was global economic destruction. The US alone can not fix this mess, nor can the US alone legislate/regulate the financial community in such a way as to eliminate a future economic catastrophe. By the way, the only "INTENTIONAL" part of the "economic destruction" was simply catapulting greed, run amok, with the smartest able to pretty well see the future and set themselves up for stupendous cash rewards. They were laughing all the way to their luxury bank offices.
To Greg R..... Obama & McCain as senators INTENTIONALLY voted for the $700b swindle which lead to TARP. Therefore I cannot accept the excuse, that they were uninformed. Shelia Baird of the FDIC, INTENTIONALLY paid out to account holders (suppossedly covered by the FDIC) at troubled banks, some of these troubled banks were not making their FDIC insurance premiums, and yet the FDIC covered them anyway, instead of letting them fall flat on their face, as the insurance contract demands. (its like car insurance, if your premium payment is lapsed your contract with the insurer becomes null) It is INTENTIONAL that the Fed Reserve held down interest rates long before the bust in 2007, and INTENTIONAL again that the Fed discount window rate continues at 0.025% wrecking dollar value, and INTENTIONALLY causing inflation and demanding deeper credit default, not just nationally, but internationally. It was and is INTENTIONAL that U.S. Congress 'legalized' such complicated instruments as CDS/CDO/MHO....years ago, allowing 'insurance of various trades', the 'run up to the crash' was ever increasing activity in these instruments, anxiously pretending the markets would never implode. They bought the insurance expecting the markets to implode, and it became INTENTIONAL when The Fed Reserve Board took over such insurers as AIG was the first and largest to be 'bailed out' because AIG had been accepting those investment insurance premiums for years & years, amassing astronomical income, but when the actual time came to 'cover the loss' from the crash in late 2007, the bottom line among all the excuses was that THE FEDERAL RESERVE BOARD ended up with AIG, and AIG did everything not to pay off as their contract demanded. AIG has sold alot of assets since 2008 under the direction of THE FED, and now THE FED proudly claims a victory with AIG once again solvent. It doesn't seem to matter at this point that the CDO/CDS market rife with fraud in nearly every direction, global even...and all the big boys still play this game..and call it a free market. So a few countries will fail to bankruptcy, a few really big corporations will bite the dust, and to this day there are those that insist on continued investing in 'worthless contracts' and even the now worthless USdollar.
whocares;)
You are intentionally (or unintentionally) conflating TARP with the Stimulus. You do not understand the total AIG picture (nor do I for that matter), but AIG was not amassing incredible amounts of money with its stupidity. For instance they were covering $100 million in CDOs for as little as $20,000 per year. Yes, Greenspan, the ideological fool, allowed the housing/mortgage bubble to continue. People with money are investing in 10-year T-bills for 2% interest. They do not share your opinion of a "worthless" dollar, nor do I.
To Greg R,....you make my point, the USdollar is practically worthless, using your numbers~~~ doesn't it seem kinda obvious? 'A 10 year contract for only 2%' gigggggggggglessssssss that is the lowest value of return that I can think of, which supports my argument...the USdollar & its counterpart 'Tbills' are worthless...but you could look at it another way: Do you remember earlier last year (2011) and 'the rating agencies' threatened to downgrade said Tbills? So you see that if, said 10 year Tbills were 'set in' at a higher level such as 3%, with that increase, there would be a necessary downgrading from AAA to AA+....even the rating agencies know the dollar is impotent at 2% but happily play the game and keep the rating at AAA, for now.
Also by the way, I never used the word Stimulus, nor did I imply Stimulus. I stated TARP as a specific Congressional funding, primarily aimed at bailing out those very corporations trading & holding toxic assets & the trouble that comes from that. Stimulus was a bribe the Congress authorized and sent out to 'all the little people' of the U.S., I received their bribery check in the amount of $350.00 some years ago, I didn't cash their bribe..and whocares if you cashed yours.
And...I never said AIG was stupid, what is rather silly to me is that they were bailed out in fact. As were so many others bailed out in fact, Merrill/wachovia/fannie/etc.due to various reasons..irresponsible management, fraud, 'to complicated to unravel sales gimmicks', and of course lack of regulatory oversight/law enforcement. Much as Bernie Madoff the former CEO of NASDAQ, when it actually got down to it, it was simply a ponzi scheme, I'm sure Madoff had some 'safe Tbills' on his cooked up portfolios, just like Fannie Mae would offer, but he did NOT have his hands on my money.
whocares;)
Look here, whocares, first put your brain in gear, then tell me why people of wealth buy the 10-year T-bills for only 2% when THEY COULD USE THEIR DOLLARS TO BUY A MILLION OTHER THINGS, whether gold, soybeans, yen, what-the-f-ever they want?
To Greg R... oh, you think I forgot the last time you called me a troll, and your almost there again, attempting to put my brain in gear..did I see that correctly? Geewhiz Greg R its kina scary just coasting along as I do, but it saves fuel yanno ;) Anyway to your latest change of subject~~why people of wealth buy 10yrTbills@2%~~ well Greg R, people of wealth DON'T BUY THAT CRAP, hahaha to put it bluntly, ohmygosh the things I say when I'm out of gear!! However The Federal Reserve does buy that CRAP!! giggggggggggles infact The Fed has been the only practical volume purchaser of those Tbills and a few other things...since 2008,~~ download this small pdf file from the fed and please notice on page5 the history & trend of said Tbills.
www.frbatlanta.org/documents/research/highlights/finhighlights/FH_082510.pdf
I won't touch that shifter just now Greg R, till after I clear the next hill, wouldn't want to blow a perfectly good synchronizer, but don't worry bumpNrun is my middle name ...I'll just stick with the gearbox I got!
whocares;)
I am inclined to view it as intentional and ugly policy, not a grand series of mistakes. If war can be waged economically, then haven’t we succeeded at renewing some small interest in the US dollar despite the illegalities and frauds.. when Europe fails and while the East unites?
hi Michigan woman, sorry I'm just now responding
It is true there seems to be an small interest in the USDollar. Perhaps because thru the years The United States represented Capitalism fairly well and Capitalism appeared so beautiful, but something has been changed drastically, and something is wrong. Perhaps there is an expectation of The United States to rally again, just like they did after the crash in '29. With hindsight, the 'smart money' in those days paid exponentially in the following years as Americans went about their business~~determined!...maybe that is part of the current small interest in the USDollar.
As an American & Capitalist, I don't want the interest gained from European failure, or Iraq failure, nor Afghanistan, nor Pakistan, nor Iceland, nor Greece, nor Russian, nor African, nor North/South/Pan American...it was not MY American & Capitalist glory in Haiti, that drove every dairyman in Haiti completely out of business. It was INTENTIONAL death, deceit economics, betrayal...that brings about such upside-down dividend.
I've been a Capitalist in all my business, all my life, and I've found that 'mistakes' are one thing & theft is always something very different.
whocares;)
In a just world Larry Summers would be serving a lengthy prison sentence. So would Mr. Obama.
That damn "jobless" recovery we all kept hearing about.
"The other striking part of this memo is the concern with "bond market vigilantes". The memo discusses the need to focus on the medium-term deficit with the idea of reaching deficit targets by 2014. The highest deficit target listed in the memo for this year was 3.5% of GDP. The memo also includes calculations with a deficit target of 2.5% of GDP, and a balanced budget."
So this explains the deficit hysteria. Let's not worry about the well being of average citizens, we're only concerned with the health of Wall St.. Unemployment is no longer important. Continued financial growth for only one small sector is all that matters. It matters not that more average citizens have no homes or jobs as long profits are up for the players on Wall St..
For those who don't know, the "bond market vigilantes" has been THE financial issue in Europe for the past year or more. The idea was that 'austerity' would give bond buyers confidence in European nation's willingness to make the tough choices and eventually have the cash to pay back any and all purchasers of their bonds. Unfortunately 'austerity' also means economic stagnation which does nothing to help a nation's actual economic outlook. The bond purchasers have basically been smart enough to see that this policy is of no actual value, and interest rates have changed little. Of course the real benefit of 'austerity,' from the point of view of the assholes, is the destruction of socialized programs.
When Central banks can simply print money to buy debt the 'bond market vigilantes' lose their power -
They lose a little power. If investors fear that printing presses are used too freely, they will not buy those US 10-year T-bills for 2%, for instance.
And then the Fed will step in and buy up the unsold long term T-bills .... Currently 90% of long term t bills are being bought by the fed - unheard of just a few years ago.
That's the cover story for austerity.
The reality is that the plutocrats are rejecting Ford's view of capitalism, in which the elite's wealth is based on profit from selling to a large middle class of workers who are wealthy enough to be able to consume.
I don't think the elite have ever been comfortable with Ford's 20th Century idea of capitalism because it makes them have to share wealth with the workers and then makes them dependent on the workers. They'd rather have some form of wealth production that is independent of the workers and doesn't need a middle class. This way they can have MORE of the wealth and be independent of the workers.
So austerity's real purpose is to speed up the destruction of a worker middle class. I'm not sure if they have any real idea what they are going to replace consumer driven capitalism with. But they are over joyed with the concentration of wealth being more and more in their hands.
The u.s. middle class isn't needed as consumers anymore. Globalization has opened new, vastly bigger markets. The capitalists have milked the red, white and blue herd dry, now they are just meat.
Larry Summers will never be held accountable as he moves on to his next safe, secure sinecure.
Frank Rich used the term "original sin" to describe the bank bailout with no conditions. Obama sinned twice by thinking that pushing money onto banks would be enough to stimulate the economy. Romer said about this, "we really f**ked up." But was it really bad judgement? The banks and financial sector have made out very well. No one went to jail. Even now no write down on principal of faulty mortgages is required of them. We, the public, have to take the losses and suffer the austerity of a contracting economy. It did not just happen that way. It was not bad judgement. It was designed that way and Obama was and is a co-conspirator.
"... no write down on principal of faulty mortgages ..."
It is more insidious. The banks are intentionally breaking people financially.
Why else would they refuse to re-work a mortgage with a homeowner who owes $200,000, then turn around and sell the foreclosed house for $100,000?
Right, more of the plan to jettison Ford's consumer driven capitalism I talked about above and to destroy the worker middle class.
Primary reason for financial institutions not selling foreclosed houses is because so many foreclosed properties are held, if they all came on line for sale, the price of houses nationally would plummet. It is to forestall this that both the financial institutions and the Federal Government do not want these houses on the market at the same time. Financial institutions would have to declare bankruptcies because of the declared loss in value of their "assets," and the Federal Government would be confronted with another financial collapse, when the public is in no mood for a bailout.
What is happening then when WF bid it’s own property at the sheriff sale to hold it and then a bit later the property is up for sale as a “Freddie” by a local real estate company and greatly reduced? Does Freddie make up the difference to the bank, or did the bank take the loss? My guess is that it was made up.. otherwise there would not be the minimum bid and it would sell at auction probably for about the same price it eventually went for. Anyone?
We all keep hoping for miracles. Throughout history the rich and connected have always been coddled during any Shock Doctrine episode. At best a few of the lesser elites take a haircut which shows the rabble that even some elites can get their just rewards. But for us, a bit of Lehman and Madoff was not enough. Not nearly.
That's exactly how it happened. By design.
And still the dupe of the savvy businessmen nominates Summers for president of the world bank--even after it was proven he was clueless. They think that all that is required is a boost of optimism and restoring confidence--that is how far removed they are from reality
But what does Obama worry? Nothing matters to him more than his command campaign pop culture performances--for which he would be much more appreciative of some celebrity award--a Grammy or an Oscar and to party with the gliteratti-- rather than an embarrassing Nobel peace prize.
While the Nobel is embarrassing, the entire embarrassment falls on the Nobel voters.
The Nobel prize was given to encourage BO to be the anti-Dubya. Clearly it failed. What's worse is that he had to have known it so he should have refused it. He didn't.
Don't make me laugh. A politician should look a gift horse in the mouth and refuse it? Please, that's truly rich.
This is a strangely bloodless essay from Dean Baker. The point is not that Larry Summers was wrong (what else is new) but that the whole goal of the Obama Administration was to restore the status quo and protect the interests of bankers and Wall Street from the inception.
No investigations or indictments needed, only bailouts; no disruptions to elite wealth, only fine tuning to get the entire Ponzi scheme back on its feet.
Now that the plutocrats have said no to tax hikes or further stimulation of the commoners, Obama is ready to give the 'little people' their haircuts-- but promises to do it with less blood and gore than the Repugnants.
Larry Summers is a 'brilliant' economist not because of his accuracy (or lack thereof), but because he is an ideological fanatic protecting the interests of the plutocracy.
Extispicy is the ritual investigation of anomalies in the internal organs of animals to predict the future. Liver, intestines, and lungs were the key organs, and favorite animal participants (typically non-volunteer) included bulls, sheep, and chickens.
In ancient Rome, trained experts call haruspices inspected the livers of chickens, and from the shape and color they attempted to predict the future decreed by the gods.
Probably because PETA would raise a raucous, we now use economists instead of chickens and rams. Accuracy levels have been maintained or even, possibly, slightly improved (this remains controversial).
Although a lot of bull is spread, no bulls are actually killed.
Maybe we should start gutting economists -- Larry Summers looks perfect for the role -- and see if we can make heads or tails of the future economy by carefully examining their entrails.
Great post.
Bill from Saginaw
Obama has done damage to himself by surrounding himself with people like Summers, Bernanke, etc., in the first place.
He surrounded himself with them because they think the same way he does and share his values. He can't plan out all his ideas, so he has to have congruent underlings to do his planning for him.
They are not responsible for the direction of the administration. Obama is responsible.
He doesn't think they've screwed up things. He thinks they did a good job of designing things according to his vision. You know what? He's right. They did do a good job of designing things according to his vision. The problem is its Obama's vision that's been designed and implemented.
Dean Baker -- one of many economists (Stiglitz, Krugman, Hudson, even Stockman -- you'all could come up with others) who Obama COULD have named to his inner economic circle. No Republican held a gun to his head to name the crooks he's amassed in that circle.
Mr. Baker has a tremendous article here:
www.counterpunch.org/2012/01/24/beyond-loser-liberalism/
in which there is also a link to his extensive study on the subject.
Ah, what could have been.
No Republican held a gun to his head to name the crooks he's amassed in that circle
Yep he picked the same thieves that pulled this nation and the world into a downward run. He'll be rewarded with a nice corner office on ws.
Thanks Dean
The further along we are into the Obama presidency, the worse the inclusion of Larry Summers and Timothy Geithner (at the exclusion of Paul Volcker), Wall Street creatures both, becomes. Larry Summers will go down in infamy as one of the worst cabinet members ever along with James Watt, Shuyler Colfax, Albert Fall, & virtually the entire Dubya cabinet.
Article Summary: Lack of recovery not Obama's fault.
Sign on Obama's desk: The buck doesn't stop here (unless it's a campaign contribution).
Baker sez: "In fairness to the Obama administration, these projections were in keeping with the consensus among economists at the time."
***
'Consensus' here is a weasel word. As folks like whocares and Greg R have pointed out, there were opposing voices. But they were not invited into the discussion. The 'consensus' resulted from the homogeneity of both Bush's and Obama's 'advisors'.
ya I caught that weasel word, hahaha oh well, hey if ya wanna try another economic opinion, I would suggest: http://michael-hudson.com/2012/01/background-briefing/
whocares;)
In fairness to the use of the word "consensus," pretty much the entire Chicago ('freshwater') school of economics, the 'austrians,' any economist who was a republican, many economists who did not understand the problem of "the zero lower bound," and a tremendous number of 'pretend' economists had the totally wrong idea when the shit hit the fan in 2007.
Dean Baker ought to call up Steve Keen. The neoliberal/neoclassical ideology (not a theory of economics), is the consensus. Steve Keen's brand new edition of Debunking Economics, destroys the neoliberal/neoclassical consensus. It is the most comprehensive and compelling critique of mainstream economic ideology since Keynes' General Theory...but goes much much further than Keynes.